8X8 Inc: Form 10-Q for the period ended Dec 31, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Quarterly Report, particularly those set forth under the section entitled "Risk Factors" in the Form 10-K.

OVERVIEW

We are a leading provider of software-as-a-service solutions for contact center, voice communications, video meetings, employee collaboration, and embeddable communication application program interfaces. Our solutions empower workforces worldwide by connecting individuals and teams so they can collaborate faster, work smarter, and better serve customers, from any location. The communications capabilities and advanced artificial intelligence/machine learning technologies of our contact center, communication and collaboration solutions are integrated into a comprehensive cloud-based offering powered by our global communications platform, which together comprise our 8x8 Platform for Customer Experience ("CX") solution. The Platform for CX delivers our unified communications as-a-service, contact center as-a-service, and communications platform as-a-service services. It includes artificial intelligence-driven self-service and digital assistance, intuitive user interfaces, and real-time business analytics and intelligence, enabling organizations of all sizes to design, deploy and adapt tailored communications and workflows for differentiated employee and customer experiences.

The Platform for CX delivers the security, scalability, high availability, and ease-of-use of a modern cloud-based architecture while masking the complexity of a global communications infrastructure. A comprehensive data layer across the platform powers 8x8 artificial intelligence/machine learning algorithms, as well as vertical-specific and purpose-built applications from our ecosystem of technology partners. This enables data-driven business insights that can drive employee productivity, resource optimization, and more effective end-customer interactions through simplified and automated workflows. Built with core cloud technologies that we own and manage internally, as well as integrated third-party applications from our technology partners, our Platform for CX enables agile workplaces and fosters seamless communications and collaboration between an organization’s customers, contact center agents, and employees, regardless of geographic location.

Our customers range from small businesses to large enterprises across all vertical markets, with users in more than 150 countries. In recent years, we have increased our focus on mid-market, enterprise, and public sector customers because these organizations typically have more complex communication and contact center requirements compared to the needs of small business customers. Organizations in these sectors – typically with 500 to 10,000 employees – are more likely to adopt multiple services and realize greater value from our unified, global communications platform and our growing product portfolio, including artificial intelligence-enabled solutions.

We generate service revenue from subscriptions to our communications services, as well as from usage of our platform. Our service subscription plans are sold on a per-user basis and are structured with increasing levels of functionality (designated as X1, X2, etc., through X8), based on the specific communication needs and customer engagement profile of each user. Platform usage, including telephony minutes, messaging, SMS, and digital and voice chat bot interactions, encompasses committed usage, which may be bundled with our service subscription plans, and uncommitted usage, which is sold on an as-used basis. Uncommitted usage of our platform increased as a percentage of revenue in fiscal year 2024 and is expected to continue to increase in the future with the introduction of new platform usage solutions.

We generate other revenue from professional services and the sale of office phones and other hardware equipment. We define a “customer” as one or more legal entities to which we provide services pursuant to a single contractual arrangement. In some cases, we may have multiple billing relationships with a single customer (for example, where we establish separate billing accounts for a parent company and each of its subsidiaries).

MACROECONOMIC AND OTHER FACTORS

We are subject to risks and exposures, including those caused by adverse economic conditions. Macroeconomic conditions that could adversely affect our business include the global economic slowdown, continued inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency exchange rates. We continuously monitor the direct and indirect impacts of these factors, as well as the overall global economy and geopolitical landscape on our business and financial results.

While the implications of macroeconomic events on our business, results of operations and overall financial position remain uncertain over the long term, we expect that adverse economic conditions will continue to adversely impact our business in future periods. For example, our installed base business, which includes more than 51,000 small businesses, continues to experience macroeconomic headwinds.

SUMMARY AND OUTLOOK

As part of our long-term strategy to grow our revenue, achieve profitability, and increase cash flow, we have focused on expanding our mid-market, enterprise and public sector customer base. We believe that continued innovation is a critical factor in attracting and retaining these customers and is an important variable in achieving sustainable growth. We are committed to maintaining a high level of investment in engineering to deliver product innovation across our Platform for CX, expand our ecosystem of integrated third-party applications, and maintain the high availability our customers require.

Our primary focus involves the following: (i) accelerating innovation, particularly in our platform and contact center as-a-service, and (ii) establishing communications platform as-a-service leadership in the Asia Pacific region and leveraging these capabilities globally. We continue to innovate new products like 8x8 Engage, voice and digital Intelligent Customer Assistant, and Agent Assist, while enhancing our platform with new capabilities, such as the Customer Interaction Data Platform and composable agent and supervisor user interfaces. These innovations enable tightly integrated solutions that prioritize ease-of-use, out-of-the-box functionality, and rapid deployment for our target customers.

Our investment in innovation has been complemented by initiatives to manage the costs of delivering our services and improve our sales efficiency. We continue to monitor factors that could have an impact on customer buying behavior and demand, including macroeconomic conditions, the competitive environment, contract duration, churn, upsell and down-sell, renewals, and payment terms, all of which have caused variability in our results and may continue to do in the future. We expect the total dollar amount of cost of service revenue and as a percentage of revenue to vary with the amount of service revenue and the mix of subscription and usage revenue within service revenue. To improve our sales efficiency, we continue to invest in marketing programs to drive awareness for our solutions, and we have increased training for our sales teams, and invested in tools to increase productivity. We have also expanded our partner programs to extend our reach within our target customer market, placing increased emphasis on developing a community of value-added resellers who provide implementation services and Tier 1 customer support in addition to sales. To support our customers and partners, we have expanded our customer success organization and continue to invest in improvements to our back-office processes to increase our operational efficiency over time.

KEY GAAP OPERATING RESULTS

To assess the success of our strategies to achieve growth and increase our cash flow, management reviews our financial performance as presented in our consolidated financial statements, including trends in revenue, gross profit margin, income (loss) from operations, and cash flow generated by operations in absolute dollars and as a percentage of revenue as presented in the following table:

(In thousands, except percentages)

20

COMPONENTS OF RESULTS OF OPERATIONS

Service Revenue

Service revenue consists of communication services subscriptions, platform usage revenue, and related fees from our unified communications as-a-service, contact center as-a-service, and communications platform as-a-service offerings. We plan to increase service revenue through a combination of new customer acquisition, cross-sell of additional products to existing customers, including new products resulting from our increased investment in innovation, geographic expansion of our customer base outside the United States, and sales initiatives with our Technology Partner Ecosystem partners, and potential strategic acquisitions of technologies and businesses.

Other Revenue

Other revenue consists of revenue from professional services, primarily for deployment of our solutions and/or platform, and revenue from sales and rentals of IP telephones in conjunction with our cloud telephony service. Other revenue is dependent on the number of customers who choose to purchase or rent IP telephone hardware in conjunction with our service instead of using the solution on their cell phone, computer, or other compatible device, and/or choose to engage our professional services organization for implementation and deployment of our cloud services.

Cost of Service Revenue

Cost of service revenue consists primarily of costs associated with network operations and related personnel, technology licenses, amortization of capitalized internal-use software, other communication origination and termination services provided by third-party carriers, and other costs such as customer service, and technical support costs. We allocate overhead costs, such as information technology and facilities, to cost of service revenue, as well as to each of the operating expense categories, generally based on relative headcount. Our information technology costs include costs for information technology infrastructure and personnel. Facilities costs primarily consist of office leases and related expenses.

Cost of Other Revenue

Cost of other revenue consists primarily of direct and indirect costs associated with the purchase, shipping and handling, and recycling of IP telephones as well as the personnel costs, and other expenditures incurred in connection with the professional services associated with the deployment and implementation of our products, and allocated information technology and facilities costs.

Research and Development

Research and development expenses consist primarily of personnel and related costs, third-party development, software and equipment costs necessary for us to conduct our product, platform development and engineering efforts, as well as allocated information technology and facilities costs.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and related costs, sales commissions, including those to channel partners, trade shows, advertising and other marketing, demand generation, and promotional expenses, as well as allocated information technology and facilities costs.

General and Administrative

General and administrative expenses consist primarily of personnel and related costs, professional services fees, corporate administrative costs, state and local taxes and regulatory fees, and allocated information technology and facilities costs.

Impairment of Long-Lived Assets

Impairment of long-lived assets consists of non-cash impairment charges for right-of-use assets and capitalized software. During the third quarter of fiscal year 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facilities. During the three and nine months ended December 31, 2023, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the consolidated statements of operations and consisted of an $11.0 million impairment of operating lease right-of-use assets.

Interest Expense

Interest expense consists primarily of interest expense related to our term loan and convertible notes, and amortization of debt discount and issuance costs.

Other Expense, Net

Other expense, net, consists primarily of gains or losses on debt extinguishment, gain or loss on warrant remeasurement, interest income, gains or losses on foreign exchange transactions, as well as other income.

Provision for Income Taxes

Provision for income taxes consist primarily of foreign income taxes and state minimum taxes in the United States. As we expand the scale of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for our United States deferred tax assets, including federal and state non-operating loss carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.

RESULTS OF OPERATIONS

Revenue

Service revenue

(In thousands, except percentages)

Three Months Ended

Service revenue decreased by $1.6 million, or 0.9%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023. This change was driven by a decrease in revenue from subscriptions of $4.3 million primarily due to a decline in revenue from customers on the Fuze platform partially offset by an increase of $2.7 million in platform usage revenue.

Nine Months Ended

Service revenue decreased by $6.8 million, or 1.3%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023. This change was driven by a decrease in revenue from subscriptions of $13.9 million primarily due to a decline in revenue from customers on the Fuze platform offset by an increase of $7.1 million in platform usage revenue.

Other revenue

(In thousands, except percentages)

Three Months Ended

Other revenue decreased by $0.5 million, or 8.7%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, due to lower product and professional service revenue of $0.4 million and $0.1 million, respectively.

Nine Months Ended

Other revenue decreased by $4.5 million, or 21.3%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, due to lower professional service and product revenue of $2.7 million and $1.8 million, respectively.

Cost of Revenue

Cost of service revenue

(In thousands, except percentages)

Three Months Ended

Cost of service revenue increased by $1.5 million, or 3.2%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to an increase of $4.0 million in costs to deliver our subscription and platform usage services. This increase was partially offset by decreases of $0.9 million in amortization of capitalized software and $1.6 million in salaries, benefits, and consulting costs.

Nine Months Ended

Cost of service revenue increased by $5.9 million, or 4.1%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, primarily due to an increase of $12.2 million in costs to deliver our subscription and platform usage services. This increase was partially offset by decreases of $3.2 million related to the amortization of capitalized software, $2.1 million in salaries, benefits, and consulting costs, and $1.0 million in software costs.

Cost of other revenue

(In thousands, except percentages)

Three Months Ended

Cost of other revenue increased by $0.1 million, or 1.3%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to a decrease of $0.1 million in salaries, benefits, and consulting costs to deliver our professional services.

Nine Months Ended

Cost of other revenue decreased by $1.0 million, or 4.3%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, primarily due to a decrease of $0.7 million in lower product costs associated with IP telephone hardware coupled with a decrease of $0.3 million in salaries, benefits, and consulting costs to deliver our professional services.

Operating Expenses

Research and development

(In thousands, except percentages)

Three Months Ended

Research and development expenses decreased by $3.0 million, or 9.0%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to decreases of $2.0 million in stock-based compensation, $1.3 million in facilities costs, $0.8 million in combined salaries, benefits, and consulting costs, and $0.3 million in other costs necessary for us to conduct our product, platform development and engineering efforts. These decreases were partially offset by increases of $1.0 million in costs to operate data centers and $0.4 million in internally-developed software.

Nine Months Ended

Research and development expenses decreased by $9.0 million, or 8.8%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, primarily due to decreases of $6.6 million in stock-based compensation, $4.0 million in combined salaries, benefits, consulting and other costs, and $1.5 million in facilities and other costs necessary for us to conduct our product, platform development and engineering efforts. These decreases were partially offset by increases of $2.1 million in costs to operate data centers and $1.0 million in internally-developed software.

Sales and marketing

(In thousands, except percentages)

Three Months Ended

Sales and marketing expenses decreased by $1.4 million, or 2.0%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to decreases of $2.3 million in channel commissions and amortization of deferred commissions and $1.7 million in stock-based compensation expense. These decreases were partially offset by increases of $1.4 million in paid media and other marketing services costs and $1.2 million in salaries, benefits, and consulting costs.

Nine Months Ended

Sales and marketing expenses decreased by $6.6 million, or 3.2%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, primarily due to decreases of $5.4 million in stock-based compensation expense and $5.2 million in channel commissions and amortization of deferred commissions. These decreases were partially offset by an increase of $3.7 million in salaries, benefits, and consulting costs and $0.3 million in paid media and other marketing services costs.

General and administrative

(In thousands, except percentages)

Three Months Ended

General and administrative expenses decreased by $6.8 million, or 29.0%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to a $6.0 million decrease associated with Fuze, Inc. legal, regulatory and state and local tax matters. During the three months ended December 31, 2024, we adjusted accruals related to USF and other Fuze, Inc. legal, regulatory and state and local tax matters and recognized a benefit of $6.0 million. The decrease was also due to decreases of $0.6 million in stock-based compensation expense and $0.2 million in salaries, benefits, and consulting costs.

Nine Months Ended

General and administrative expenses decreased by $17.7 million, or 22.9%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, primarily due to a $14.7 million decrease associated with Fuze, Inc regulatory and state and local tax matters. During the nine months ended December 31, 2024, we adjusted accruals related to USF and other Fuze, Inc. legal, regulatory and state and local tax matters and recognized a benefit of $9.2 million, compared to $5.5 million of expenses recognized during the nine months ended December 31, 2023. The decrease was also due to decreases of $2.5 million in salaries, benefits, and consulting costs and $2.0 million in stock-based compensation expense. These decreases were partially offset by an increase of $1.5 million in other general corporate costs.

Impairment of Long-Lived Assets

(In thousands, except percentages)

Three Months Ended and Nine Months Ended

Impairment of long-lived assets decreased $11.0 million for the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023. During the third quarter of fiscal year 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. During the three and nine months ended December 31, 2023, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the condensed consolidated statements of operations and consisted of an $11.0 million impairment of operating lease right-of-use assets.

Other expense, net

Interest expense

(In thousands, except percentages)

25

Three Months Ended

Interest expense decreased by $4.2 million, or 41.8%, for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to the 2022 Term Loan debt extinguishment and decreased interest rate and principal on the 2024 Term Loan. See Note 8, Convertible Senior Notes and Term Loan, for further details.

Nine Months Ended

Interest expense decreased by $6.5 million, or 21.4%, for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, primarily due to the 2022 Term Loan debt extinguishment and decreased interest rate and principal on the 2024 Term Loan. See Note 8, Convertible Senior Notes and Term Loan, for further details.

Other income (expense), net

(In thousands, except percentages)

Three Months Ended

We recognized $0.8 million of other income, net during the three months ended December 31, 2024 compared to $1.3 million of other expense, net during the three months ended December 31, 2023, primarily due to a $2.2 million decrease in loss on foreign exchange and other expenses and a decrease of $0.5 million in gain on the remeasurement of warrants issued in connection with the term loan. These expense decreases were offset by a $0.6 million decrease in interest income earned on highly liquid investments.

Nine Months Ended

We recognized $10.2 million of other expense, net during the nine months ended December 31, 2024, compared to $1.1 million of other income, net during the nine months ended December 31, 2023, primarily due to a $10.4 million increase on loss of debt extinguishment due to the payoff of the 2022 Term Loan and a $0.9 million increase in loss on foreign exchange and other expenses.

Provision for income taxes

(In thousands, except percentages)

Three Months Ended

The provision for income taxes increased by $0.4 million for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, driven by an increase in estimated United States cash taxes recorded in fiscal year 2025 compared to fiscal year 2024.

Nine Months Ended

The provision for income taxes increased by $1.1 million for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, driven by an increase in estimated United States cash taxes of $0.9 million and an increase in foreign income tax expense of $0.2 million.

Liquidity and Capital Resources

We believe that our existing cash, cash equivalents and our anticipated cash flows from operations will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for a minimum of the next twelve months and the foreseeable future. Although we believe we have adequate sources of liquidity for at least the next twelve months and for the foreseeable future, the success of our operations, the global economic outlook, and the pace of growth in our markets could impact our business and liquidity.

Cash, Cash Equivalents, and Investments

The following is a summary of our cash and cash equivalents and investments (in thousands):

(1) Restricted cash supports letters of credit securing leases for office facilities and certain equipment for the same periods.

Our primary requirements for liquidity and capital are working capital needs due to delivery of our various products to customers, research and development, sales and marketing activities, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met from cash provided by operating activities and our cash and cash equivalents balances. Our current capital deployment strategy for fiscal year 2025 is to use excess cash on hand to support our continued growth initiatives into select markets and planned software development activities and pay down our debt. As of December 31, 2024, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Significant cash requirements for the fiscal year include our operating lease obligations, interest payments related to our debt obligations, and operating and capital purchase commitments. For information regarding our expected cash requirements and timing of payments related to leases and non-cancelable purchase commitments, see Note 6, Leases, and Note 7, Commitments and Contingencies, respectively, to the consolidated financial statements in our Form 10-K. Additionally, see Note 8, Convertible Senior Notes and Term Loan, to the consolidated financial statements in our Form 10-K for more information related to our debt obligations and applicable covenants.

We are aware that our 2028 Notes are currently trading at a substantial discount to their respective principal amount. Furthermore, our outstanding 2024 Term Loan allows for voluntary prepayments. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, make prepayments on our 2024 Term Loan, and seek to retire or purchase our outstanding debt through open-market purchases, privately negotiated transactions or otherwise. Any such transactions will be dependent upon several factors, including our liquidity requirements, contractual restrictions, prevailing market conditions, and other factors. Whether or not we engage in any such transactions will be determined at our discretion. The amounts involved may be material.

Cash Flows

The following is a summary of our cash flows provided by (used in) operating, investing and financing activities (in thousands):

Cash provided by operating activities decreased by $8.7 million to $57.7 million for the nine months ended December 31, 2024, mainly due to an increase in cash paid to suppliers and employees partially offset by an increase in cash received from customers. Cash used in investing activities decreased $22.5 million to $10.2 million for the nine months ended December 31, 2024, mainly due to decreases in the purchases, sales, and maturities of investments. Cash used in financing activities increased by $36.5 million to $59.1 million for the nine months ended December 31, 2024, mainly due to principal repayments for our term loan, payments for debt issuance costs, and other financing activities.

Debt Obligations

See Note 8, Convertible Senior Notes and Term Loan, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding our debt obligations.

2024 Delayed Draw Term Loan

On July 11, 2024, we entered into a new term loan credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders thereto (the “2024 Credit Agreement”). The 2024 Credit Agreement establishes a delayed draw term loan facility in an aggregate principal amount of up to $200.0 million maturing on August 15, 2027.

On August 5, 2024, we drew upon the entire facility of $200.0 million under the delayed draw term loan facility (the "2024 Term Loan") and used the proceeds of the 2024 Term Loan and cash on hand of approximately $29.0 million to repay in full the $225.0 million of outstanding principal amount and accrued interest of the 2022 Term Loan and the fees incurred in connection with the repayment (the "Repayment").

The 2024 Term Loan bears interest at an annual rate equal to Term SOFR, plus a margin of either 2.50%, 2.75% or 3.00% based on the consolidated total net leverage ratio of the Company and its subsidiaries. The initial margin will be 3.00% for the fiscal quarter ending September 30, 2024. We have the option to pay interest monthly, quarterly, or semi-annually. During the three months ended December 31, 2024, we elected quarterly payment terms which resulted in cash payments of $3.2 million. During the three months ended March 31, 2025, we have elected monthly interest payment terms, which will result in cash payments of approximately $2.9 million. As of August 5, 2024, the scheduled principal repayments of $22.5 million in fiscal year 2025 ($7.5 million on October 31, 2024, December 31, 2024 and March 31, 2025, respectively), $37.5 million in fiscal year 2026 ($7.5 million on June 30, 2025 and $10.0 million on September 30, 2025, December 31, 2025 and March 31, 2026, respectively), and $47.5 million in fiscal year 2027 ($10.0 million on June 30, 2026, $12.5 million on September 30, 2026 and each quarter thereafter through maturity) are required, and the remaining $92.5 million principal is due before or upon maturity in fiscal year 2028. These annualized repayments will be made in quarterly installments. As of December 31, 2024, the debt issuance costs are amortized to interest expense over the term of the 2024 Term Loan at an effective interest rate of 8.69%.

Under the terms of the 2024 Credit Agreement, we have the right to prepay the 2024 Term Loan at any time without any premium or penalty. On October 7, 2024, we paid $15.0 million of quarterly principal payments due October 31, 2024 and December 31, 2024 under the 2024 Term Loan. On November 1, 2024, we prepaid $18.0 million of additional principal payments. These short-term principal debt payments are accounted for as partial debt extinguishment transactions. The carrying value of the 2024 Term Loan, including the unamortized debt discount and issuance costs, was derecognized. The difference of $0.2 million between the cash consideration paid to partially extinguish the 2024 Term Loan and the carrying value of the 2024 Term Loan was recognized as a loss on debt extinguishment included in the loss on debt extinguishment line item recorded in other expense in the condensed consolidated statement of operations. The remaining principal amount of the 2024 Term Loan after the payments is $167.0 million. As of December 31, 2024, we have paid $22.5 million and $10.5 million of the originally scheduled principal repayments for fiscal year 2025 and fiscal year 2026, respectively. On January 10, 2025, we paid $15.0 million of quarterly principal payments due July 31, 2025 and October 31, 2025 under the 2024 Term Loan. See Note 14, Subsequent Events, for more information regarding this prepayment.

2022 Term Loan Extinguishment

On August 5, 2024, we repaid in full the outstanding principal amount and accrued interest of the 2022 Term Loan using the proceeds of the 2024 Term Loan and cash on hand. The Repayment was accounted for as a debt extinguishment. The carrying value of the 2022 Term Loan, including the unamortized debt discount and issuance costs, was derecognized. The difference of $12.0 million between the cash consideration paid to extinguish the 2022 Term Loan and the carrying value of the 2022 Term Loan was recognized as a loss on debt extinguishment included in the loss on debt extinguishment line item recorded in other expense in the condensed consolidated statement of operations. The Warrants continued to be outstanding with no change in terms in connection with the Repayment or issuance of the 2024 Term Loan.

We previously used the proceeds from the 2022 Credit Agreement to fund the cash portion of an exchange of the Company's approximately $403.8 million principal amount of 0.50% convertible senior notes due 2024 for cash plus approximately $201.9 million of 4.00% convertible senior notes due 2028, and the concurrent repurchase of approximately $60.0 million of our common stock with the counterparties to such exchange. Loans made under the 2022 Credit Agreement bore interest at an annual rate equal to the Term SOFR, subject to a floor of 1.00% and a credit spread adjustment of 0.10%, plus a margin of 6.50%. During the three months ended September 30, 2024, we paid $2.7 million of interest under the 2022 Term Loan. See Note 8, Convertible Senior Notes and Term Loan, to our condensed consolidated financial statements for details.

Material Cash Requirements and Other Obligations

As of March 31, 2024, our material cash requirements and other obligations were $690.1 million. During the nine months ended December 31, 2024, we entered into a $24.1 million noncancelable three-year hosting service contract. Under this agreement, $4.5 million remains due during fiscal year 2025, $8.5 million will be due during fiscal year 2026, $6.0 million will be due during fiscal year 2027 and $2.5 million will be due during fiscal year 2028. For information regarding our material cash requirements and other obligations, see Item 7, "Management's Discussion and Analysis", in our Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of assets and liabilities. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). See Note 1, The Company and Significant Accounting Policies, in the notes to the unaudited condensed consolidated financial statements included in this Quarterly Report, which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. There have been no significant changes during the nine months ended December 31, 2024 to our critical accounting policies and estimates previously disclosed in our Form 10-K.

There have been no material changes in our exposures to market risk since March 31, 2024. For details on the Company’s interest rate and foreign currency exchange risks, see Part I, Item 7A. “Quantitative and Qualitative Information About Market Risks” in our Form 10-K.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2024. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2024, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the three months ended December 31, 2024, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Investing in our securities involves risk. Prior to making a decision about investing in our securities, you should carefully consider the specific factors discussed below and under the heading “Risk Factors” in any prospectus supplement, together with all of the other information contained or incorporated by reference in this Quarterly Report. You should also consider the risk factors related to our business and operations described in Part I, Item 1A of the Form 10-K under the heading “Risk Factors,” and in Part II, Item 1A of the Form 10-Q for the period ended June 30, 2024 under the heading "Risk Factors," which are incorporated by reference in this Quarterly Report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations.